Behind the curtain of student loans

Last month, a former law student won a bid in bankruptcy court to discharge nearly $340,000 in education debt because her diagnosis of Asperger syndrome rendered her unable to repay the loans. The U.S. Bankruptcy Court for the District of Maryland found that Carol Todd, who attended (the University of Baltimore School of Law, met the difficult burden of showing that she would suffer undue hardship if forced to repay her debt.
Todd received her high school GED during the late '80s, at age 39. She received an associate degree at Villa Julie College (now Stevenson University) and a bachelor's degree at the College of Notre Dame of Maryland (now Notre Dame of Maryland University). She began attending law school in 1992 but did not complete the program. She went on to obtain a master's degree from Towson University and a Ph.D. from an unaccredited online school in 2007. She filed for Chapter 7 bankruptcy in 2009. Todd pursued success in education "as a stepping stone toward a measure of liberation...to help her achieve something closer to a normal life."
Carol’s case is a rarity. The difficulty of proving undue hardship —the majority of claims are unsuccessful — and of discharging student loans has prompted the National Association of Consumer Bankruptcy Attorneys to call on Congress earlier this year to pass legislation that would allow graduates to discharge loans taken out from private lenders, including for-profit companies such as banks and student loan behemoth Sallie Mae. Similar legislation has been submitted over the past two years by Congressional Democrats without making much progress, but NACBA holds hope that this will change soon.
While Todd's story raises questions about undue hardships to borrowers due to a permanent mental disability, what does this mean for any changes to legislation when it comes to a borrower who suffers a permanent physical disability that ultimately prevents him or her from holding down a stable job to pay off student loans? Will Carol's court decision cause lenders to increase scrutiny on prospective students with disabilities? What if the borrower is the victim of a tragic accident that leaves him in a coma? What happens when the borrower dies, but has a parent co-sign the loan?

4 comments

The issue I have with Ms.Todd’s discharge is that her condition preceded her accruing the debt and apparently it didn’t limit her ability to earn the degrees. I think the question regarding the implication this could have on disabled borrowers by lenders is a good one.

It’s important, when speaking of student loan debt, to remind readers where this loan bubble started. When George Bush came to office and moved public students loans to private lenders, he at the same time created the mantra of all students needing a masters degree to be competitive in the future labor market. We heard over and again, get that masters! So, you have students who would not normally go in debt to the extent they did being counciled to do so. Bush was the driver of the subprime mortgage bubble and knew that the bubble would burst, so loading these students with loan debt with private banks mirrors his push to place low-income people in these subprime loans.

We know that in both cases there is a lapse of moral and ethical behavior, especially with the for-profits colleges, but we also know there was a good deal of fraud and criminal activity. We all know that both the homeowners and these students who are victims of malfeasance, should have these loan principles written-down at best. We need our journalist reporting this side of the story as we move forward towards that goal!

Cindy, seriously? George Bush is to blame for this too? Really? Besides being factually inaccurate and incomplete, it’s just plain silly and irrelevant.

While I agree that various actors have played a role. Not in any particular order: first, the government for backing the loans. This distorst the market. It removes the natural incentive to be deligent about to whom one is lending. Companies are less likely to worry about and takes steps to mitigate the risk when there really is no risk. The loan is backed by the US gov’t. Who cares if the student has 300k loans largely for degrees that will never provide an income to pay that? Compare to a car loan. Lenders analyze debt-income ratio to be sure you can pay b/c they don’t want to get stuck. They look at how long you’ve had a job, etc. Here, they don’t bother with that b/c the US gov’t has stepped in to back the loan. They don’t care that people are going to school for 40k/year to become an art major, knowing full well few art majors will ever earn enough to pay that back. The gov’t’s well intended efforts have created this bubble. Easy unchecked flow of money. Please spare be the hyperbole about not wanting people to be educated, lower income people to have access, etc. That’s not the case at all. I’m not arguing against the underlying principle and outcome sought. I’m citing a factual reality. It occurred here and in the subprime lending areana.

Second, the lenders bear responsibility for knowing this and doing it anyway thereby exploiting the gov’t’s stupid policy. That sad, some have a duty to investors and must maximize profitability. Regardless of how you come out on this, they clearly contributed to the mess.

Third, the schools. Inflating numbers, presenting misleading info, failing to disclose, etc. Runaway inflation (professor salaries, crazy accomodations, etc.). If the education system was viewed and treated like every other entity that exists to makes money, it would be on par with oil companies and car dealers. Education is great. Only those interested in suppressing people could disagree. The education indsutry is, like other entities that make money off others, is entirely to blame as well. Often little to no ROI. Constantly coming up with new products that serve little real world purpose. Conduct violative of most states consumer protection statutes, if they weren’t exempted. No concern or regard for the students. Who would encourage and turn a blind eye to 20 year olds taking on hundreds of thousands in debt, knowing the degree sought will never ever provide the means to repay? Entities who care more about profits, rankings, etc. than people. How the left and right bicker over educational institutions on one side and corporations on the other baffles me. The similarities are striking.

Finally, and maybe to some most importantly, the borrowers. They signed the papers each semester. They saw the amounts borrowed. They could’ve researched the average salaries for people with X, y, z degrees, learned about the job market, etc. They knowingly took on the debt and promised to pay.

Now, in the case of people who suffer catostrophic injuries or unforseeable health problems, of course we as a society should want to help these people. I’m not sure, however, that screwing over the lending industry is the proper way to do so. For one, it introduces a layer of risk in the process, which in turn discourages lenders from providing capital. Further, it punishes them just because they, we assume, have deep pockets. How about if everyone involved shares some of the risk and consequences, e.g., the service/product provider, the schools? Why no outage toward them?

A better solution, of the top of my head, is insurance. Putting aside the fact that all of these individuals could’ve purchased, likely at low cost, disability and related insurance, there’s also an opportunity here for insurance companies to provide a new product.

What would help would be this:

1) Realize that (expensive) education is not a panacea. It’s not for everyone. There’s no enough need for and not everyone is suited for the millions of paper the thousands of schools out there are pushing.

2) Everyone needs to do a cost-benefit analysis, students and lenders.

3) Schools need to be held to the same standards as everyone else. They should be able to be held accountable just like any other entity selling a service or product.